Comment Letter in HTML (W0013038.HTM;1)From: Chilton, John [jchilton@sandw.com]
Sent: Wednesday, November 27, 2002 10:54 AM
To: 'rule-comments@sec.gov'
Subject: File No. S7-40-02
November 26, 2002
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Jonathan A. Katz, Secretary
Re: Disclosure Required by Sections 404, 406 and 407 of the
Sarbanes-Oxley Act of 2002, Securities Act Release No. 8138
(File No. S7-40-02)
Ladies and Gentlemen:
I am writing on behalf of the independent Directors of the Merrill Lynch Mercury
Funds and the Merrill Lynch Funds for Institutions Series (the “Funds”), a group
of closed-end and open-end investment companies registered under the Investment
Company Act of 1940, to provide our comments on the Commission’s proposed rulemaking
under Section 407 of the Sarbanes-Oxley Act of 2002 (the “Act ”).
Our comments relate primarily to three specific aspects of the proposed rules of
particular interest to us: (1) the proposed definition of “financial expert”;
(2) the proposed requirement that the identity of an audit committee’s financial
experts be disclosed in an issuer’s public filings; and (3) the potential liability
that may apply to those persons who are designated as financial experts.
Background on the Funds
The Funds consist of five registered investment companies, with thirteen separate
portfolios, managed by Merrill Lynch Investment Managers and its affiliates. The
Funds have combined net assets of approximately $80 billion. Currently, the audit
committees of the Funds include six Directors, all of whom are “disinterested
directors” under the Investment Company Act. All six have extensive experience in
commercial banking, investment banking, or the securities industry. Two have served
as senior executives of a money center bank, one as chief financial officer. Two are
professors of finance at internationally-recognized graduate business schools.
Definition of “Financial Expert”
We believe that the proposed definition of “financial expert” is overly restrictive
and should be substantially broadened in two ways. First, the proposed definition
unnecessarily limits the types of experience that would qualify an individual as a
financial expert. Under the proposed rule, only someone who had audited the financial
statements of investment companies or who had served as the chief financial or accounting
officer of a mutual fund group would qualify as a financial expert of an investment
company’s audit committee. Because there are relatively few retired mutual fund
CFOs or mutual fund auditors, this standard would mean that only a small universe of
individuals could ever qualify as “financial experts” for investment companies.
Moreover, the universe of potential candidates for a particular fund group would be
even further narrowed by the need to find audit committee members who qualify as
“disinterested” directors of that group under the Investment Company Act and who
would not compromise the independence of the fund group’s independent auditors. [1]
The rule should include a significantly wider range of business or academic experience
as giving an individual the necessary ability to understand mutual fund financial
statements. In particular, individuals with substantial training or experience in
investment management, investment banking, commercial banking, finance, or securities
analysis, or in auditing or preparing financial statements of issuers other than
investment companies would normally have the requisite expertise to be “financial
experts.” In addition, a board should have the ability to determine, under appropriate circumstances, that a chief executive officer or other senior officer of a public
company has sufficient experience to qualify as a “financial expert.” We note that
the Act elsewhere requires that the CEO of a reporting company certify as to the
accuracy and completeness of the company’s financial statements; this indicates that
Congress believes that a CEO should be able to read and understand those statements.
Second, we believe that the proposed rule’s listing of five required attributes of a
“financial expert” is unnecessarily restrictive. While Congress directed the Commission
to consider whether an individual possessed those five attributes, the Act does not
require that each prospective financial expert have all five. In particular, the two
attributes that require experience applying accounting principles and either preparing
or auditing financial statements of comparable issuers once again effectively limit the
universe of possible experts to former mutual fund financial officers and outside auditors.
Instead, the rule should direct a mutual fund board to consider whether an individual
with the requisite experience has one or more of the listed attributes. This rule
would be consistent with Congress’ desire to ensure audit committee effectiveness
while permitting individuals with significant financial or accounting experience to
qualify. Such a rule would also be consistent with our experience that an effective
audit committee member is one who uses his or her general experience and sound business
judgment to probe conscientiously the decisions of an issuer’s financial officers and
independent auditors, rather than someone who second-guesses those decisions based upon
his or her specific expertise.
In addition, unless the Commission determines to broaden the definition to cover a
wider range of financial training and experience, the Commission should use a different
term than “financial expert.” What the Commission has defined in the proposed rule
is more properly designated as an “accounting expert” or perhaps an “industry-specific
accounting expert.” It would be misleading for issuers to state that they had no
“financial expert” on their audit committees where the issuers, like the Funds, have
several individuals whom any reasonable investor would regard as “financial experts”
by virtue of their business experience or academic expertise.
Identification of Financial Experts
We strongly oppose the portion of the proposed rules that would require an issuer to
identify the financial experts on its audit committee. As the Commission itself noted,
the Act does not require disclosure of the experts’ identity, and identifying specific
committee members as experts would expose those members to greater scrutiny and risk
of being singled out in litigation. As a result, individuals will be unwilling to be
designated “financial experts,” even where they would otherwise qualify.
Liability of Financial Experts
Individuals will especially be deterred from serving as a financial expert if the
Commission fails to provide them with adequate protection. Therefore, whether or
not the final rule requires that an audit committee’s financial experts be identified,
the Commission should expressly provide by rule that those individuals are not
“experts” for purposes of liability under the Securities Act of 1933 and that those
individuals do not, by reason of that designation, have any greater liability under
any provision of the federal securities laws than any other member of the audit
committee.
* * *
We appreciate this opportunity to comment on these matters.
Respectfully submitted,
/s/ Karen Robards
Karen Robards
Audit Committee Chair
Mercury Funds, Inc.
Mercury V.I. Funds, Inc.
Mercury Master Trust
The Europe Fund, Inc.
Merrill Lynch Funds for Institutions Series
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[1] The Commission’s auditor independence rules would generally preclude a retired partner of an investment company’s independent auditing firm from serving as an independent director. Because major fund groups, including ours, use more than one audit firm, the field would be even narrower.